CANADA FX DEBT-C$ firms as investors rethink Fed hike likelihood

OTTAWA, Oct 5 The Canadian dollar strengthened against the greenback on Monday as investors tried to gauge how long the U.S. Federal Reserve will keep interest rates at ultra-low levels following last week’s disappointing U.S. jobs report.

Markets have been expecting the Fed to begin to raise rates before the end of the year, but data on Friday that showed the U.S. added 142,000 jobs last month, far below expectations, raised some doubts. August’s figures were revised sharply lower.

That pressured the U.S. dollar to the benefit of the Canadian dollar, though the greenback strengthened modestly against a basket of currencies as risk appetite improved through the session. Since hitting an 11-year low at the end of September, the loonie has gained nearly 3 percent.

“The price action that we’re seeing in the markets today is a little bit of exhaustion from the U.S. dollar bulls,” said Scott Smith, senior market analyst at Cambridge Global Payments in Toronto.

“With the back-to-back soft employment reports over August and September out of the U.S., market participants are starting the rethink that a liftoff from the Federal Reserve is possible in 2015.”

Even so, Smith expects the Fed to raise rates at its December meeting as long as recent market volatility does not continue.

The Canadian dollar ended the North American trading session at C$1.3087 to the greenback, or 76.41 U.S. cents, stronger than the Bank of Canada’s official close of C$1.3164, or 75.96 U.S. cents.

Stable oil prices provided support for the Canadian dollar. U.S. crude prices settled up 72 cents at $46.26 a barrel.

Investors will turn their attention to Canadian domestic data through the rest of the week, including the trade balance on Tuesday and the jobs report on Friday.

After two interest rate cuts earlier this year, the data is unlikely to sway the Bank of Canada’s policy stance of keeping rates on hold for now, said Smith.

Still, the Canadian dollar could test the C$1.33 to C$1.34 area if the data disappoints, he said.

Canadian government bond prices were lower across the maturity curve, with the two-year price down 1 Canadian cent to yield 0.51 percent and the benchmark 10-year falling 35 Canadian cents to yield 1.44 percent.